What market crash?

The JSE All Share Index took aerial photographs of the 29 000 level as it flew over it! In March 2009 the market was at 18 000 points and now it is at 29 245 point. This is a 62% increase! (an investment in cash gave you about 7.5% taxable).

Lessons to be learnt.
13 months ago when things were at it's darkest and the ashes of Armageddon were raining down on the world, a small group of us were huddled round a boardroom table at the company I work for and we were asking the question " what now?"

We made one very important decision namely: "We are not clever enough to know what the market will do, so stick to the fundamentals of investing".

These fundamentals can be summed up as follows:

• Shares will outperform cash over the longer term (10 years +).
• Cash will provide stability over the shorter term (0-3 years).
• Asset classes will revert to their longer term average valuations.
• Timing the market is more about luck than skill.
• Base your investment decisions on your projected need for expenditure.

Based on these fundamentals we took the following decisions:

• Shares are very cheap compared to their longer term average valuations.
• Interest rates on cash investments will come down to stimulate growth. Bad for cash.
• When the recovery will take place is impossible to predict but when it starts you will not have time to get into shares, you have to be in already.
• Perform cash flows on our client's portfolios and ensure that they have enough cash for any expenditure over the next 3 years and make sure that the balance of their money is invested in shares.

Currently we are in the same situation of uncertainty. We are asking the question "what now?" again.

We go to the presentations of some of the best investment professionals in South Africa on a weekly basis and study all the investment and market analysis available. They have been predicting a market pullback since the JSE All Share was on 26 000 points and that the Rand against the $ should be at R8.70 but things are exactly the opposite.

The moral of the story is that somehow the predictions of people can be very wrong and that the market will continue doing what it did in the past. I therefore invest according to proven investment fundamentals and adjust my portfolio only slightly as things become obviously out of sync.

I can only say the following:

• Don't be greedy, stay in cash where you might need the cash over the next 3 years.
• Don't be fearful, stay in shares where you will not need the cash for the next 10 years.
• Re-calculate your cash flow every year and make adjustments to your investment portfolio where necessary.

There are two things I do indulge in that deviates from the pure investment fundamentals and they are:

• I keep the equivalent of 1 extra years expenses in cash based on my cash flow projection. This provides me with some additional cash to buy shares with should there be a substantial correction in the markets.
• I believe that the Rand will go back to R8.50+ against the US$ and focus on Rand hedge shares/financial instruments.

Don't try to predict what the market will do!! Have both cash and shares in your portfolio. Cash for short term expenditure and Shares for growth.

Remember: You only need to beat Inflation after costs and taxes to move forward in life.